JPMorgan: DB Realty; Neutral; Building up...steadily

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DBRL’s share price has underperformed the index over the last 3 months
(+1% vs. BSE Realty 16%). This is despite DBRL achieving decent progress
on its targets.Over 1H11,DBRL has already achieved 45% of its full year presales
guidance of Rs 36B.Recent soft launch of MIG Housing project in
Bandra east too has gone off well with the company selling off 10% of the
project quickly. Earnings surprise over 2Q/3Q (FY11 Guidance of Rs 8.3B
PAT vs. consensus PAT of Rs 5.1B), possibility of stake sale in Bandra East
project establishing a firm valuation basis, and formal notification of new
project acquisitions could provide near term re-rating triggers.
• DBRL on track to achieve sales guidance–DBRL has achieved pre-sales
of Rs16B (1.1 msf) in 1HFY11, ~45% of its Rs36B full year guidance. With
some scale up in 2H (seasonally strong period) and new project launches
(6.2 msf over FY11), we think the target should be met comfortably. DBRL
continues to see healthy traction in its South Mumbai portfolio (>70% of
bookings, 0.3msf sold in 2Q vs. 0.2msf in 1Q) despite 2Q being seasonally
weak. Additionally, response to soft launch of Bandra MIG colony has been
good (0.1msf sold at Rs16Kpsf). On its suburban portfolio, Q/Q volumes
have remained largely stable, though pricing has gone up.
• Debt levels should increase over FY11 on project acquisitions– While
company is currently net cash (Rs4.5B); premium payments for Bandra
government colony project/new acquisitions will increase net debt. Against
Rs 20B of operating cash flow guidance, the outflow on new projects is
expected to be Rs 30B. We expect the gearing (debt/equity) to increase to
0.9x by FY12-end from current net cash position. Management indicated it
is in discussions to raise Rs12B from PE players by diluting 20% stake in
the Bandra government colony project valuing it at almost Rs 60B (Rs 217/
Share to DB).
• Organizational build out is happening… with the company hiring a
number of expats to build out project management /execution capacity. We
believe that many of these professionals have had good experience in high
rise construction in middle-east. The company has also engaged Deloitte
/SAP for project implementation and monitoring purposes.
• Investment view- We have a Neutral rating on DB Realty with Mar-11 PT
of Rs 480 (12x Mar-11 normalized FCF). However, earnings surprise over
2Q/3Q, possible stake divestment of Bandra project and improvement in pre
sale levels of new projects (Island city/ Bandra) should translate into steadily
improving earnings/ROE profile. Key downside risks are any litigation/
reversal of awarded projects, or inability to meet pre sales targets for FY11.